JAKARTA (TheInsiderStories) – Japan’s real GDP growth turned negative in the third quarter (3Q). A rebound of economic activity is likely in the fourth quarter but softer external demand could continue to weigh on near-term growth.

Japan’s real GDP growth fell by 0.3 percent quarter-on-quarter (QoQ) to 1.2 percent annualized, following a 0.8 percent on quarterly basis to 3.0 percent in annualize basis rise in the previous quarter.

The major factor behind the contraction was disruption caused by natural disasters (floods and landslides in western Japan in July as well as Typhoon Jebi and the Hokkaido earthquake in September).

Private consumer spending fell by 0.1 percent (QoQ) due to a 0.7 percent (QoQ) contraction of spending for services such as travel and recreational activities suppressed by natural disasters.

Net exports also made 0.1 percentage point negative contribution to the contraction of real GDP growth for the second consecutive quarter.

While weaker external demand continued to soften exports of goods, natural disasters (including the temporary shutdown of Kansai International Airport) hurt both export goods and services, leading to a contraction of 1.8 percent (QoQ) and the first decline in five quarters.

Sluggish exports were partially offset by an 8.2 percent (QoQ) drop for imports of services, reflecting weaker payments for transport and other services.

Although residential investment rose by 0.6 percent (QoQ) following five consecutive quarters of decline, capex fell by 0.2 percen (QoQ) for the first contraction since the third quarter of 2016.

Inventory also declined, largely in distribution, which probably reflected disruption caused by natural disasters. Public demand also declined by 0.2 percent (QoQ), largely reflecting a 1.9 percent (QoQ) contraction of public investment.

Harumi Taguchi, Principal Economist, IHS Markit rated, the Japan’s real GDP growth is likely to return to positive territory for the fourth quarter after the drop-out of disruptions caused by natural disasters. That said, a rebound for the fourth quarter could be suppressed by sustained weak external demand and uncertainties over global trade tensions.

Reflecting the third quarter results, IHS Markit has revised down its outlook for Japan’s real GDP growth for 2018 to 0.9 percent from 1.0 percent. Capital expenditure, which drove a solid rebound in the third quarter, could be a key factor for the strength of rebound in the fourth quarter, but the momentum of private machinery orders has softened.

Although the capital expenditures plans remained solid, equipment for countering labor shortages, weaker external orders and sluggish industrial production have weighed on corporate sentiment. Sustained uncertainties and higher costs could push out corporations’ investment plans and weigh on wage increases.

A JPY1-trillion sized supplementary budget and the likelihood of increases for public works in the fiscal year 2019 budget are likely to accelerate the recovery from natural disasters, as well as the government plan to implement various measures to offset the downside caused by the introduction of the consumption tax hike in October 2019.

That said, softer wage increases relative to higher prices could make consumers cautious about spending until front-loaded demand ahead of the tax hike emerges.

Written by Staff Editor, Email: theinsiderstories@gmail.com